TSE’s Realignment should Increase Corporate Motivation for Growth

Is it possible to reorganize the stock market in a way that is easy to understand and attract investment? Efforts must be made to ensure that the market reorganization does not end up being merely a signboard replacement.

The Tokyo Stock Exchange has announced that in April 2022 it will abolish the current four sections of the TSE — the First Section, the Second Section, Mothers and Jasdaq — and reorganize them into three sections — Prime, mainly for large companies; Standard, for medium-sized companies; and Growth, for emerging companies.

Currently, about 2,200 companies are listed on the top-tier First Section, a number that has doubled in the past 30 years. The figure accounts for 60% of all companies listed on the TSE.

In the past, the First Section was seen as the place with a concentration of Japan’s leading companies. However, due to lax criteria for promotion and an increase in the number of companies that continue to perform poorly, it has become a market with ambiguous characteristics, featuring a mix of businesses with market capitalizations of over ¥1 trillion alongside those with market capitalizations in the billions.

The aim of clarifying the division of roles on the bourse and capturing more funds from overseas, especially on the Prime section, is understandable. It is also appropriate to consolidate Jasdaq and Mothers, which are both aimed at emerging companies but are difficult to distinguish.

However, it must be said that the streamlining of companies that can be listed on Prime is insufficient at this point.

Excluding so-called “cross-shareholdings” held by banks and business corporations over the long term, the requirement for listing on Prime is to have ¥10 billion or more in tradable shares, and there are said to be about 600 companies on the First Section that do not meet this requirement.

There were many protests from such companies that this would effectively be a demotion, so the TSE set up a transitional measure that allows companies to move to Prime at their current status if they submit a plan to meet the criteria.

As a result, most of the companies on the First Section might move to Prime.

The prime markets of major European exchanges are limited to about 300 to 500 companies to improve their attractiveness.

At the start of reorganization planning in Japan, there was also a proposal to carefully select companies with large market capitalizations for the Prime section that would attract the attention of foreign institutional investors.

Shortening the transitional period during which the criteria can be ignored and narrowing the focus to stocks worthy of “Prime” status would be desirable to revitalize the market. The criteria should be strictly enforced to increase the sense of urgency among companies.

In Japan, it has been said that promotion to the First Section has become the “goal” and that this has discouraged companies from trying to increase their corporate value after being listed. This is believed to be a factor in the sluggish growth of average stock prices and market capitalizations in Japan compared to those in Europe and the United States.

It is hoped that the market realignment will serve as an opportunity to awaken the desire for growth among companies.

— The original Japanese article appeared in The Yomiuri Shimbun on Jan. 19, 2021.